Boom-Bust Cycles: Leveraging, Complex Securities, and Asset Prices

40 Pages Posted: 8 Oct 2009 Last revised: 26 Jun 2017

See all articles by Lucas Bernard

Lucas Bernard

New School for Social Research

Willi Semmler

The New School - Department of Economics; Universitaet Bielefeld; IIASA

Date Written: November 1, 2009

Abstract

It appears that many boom-bust cycles are driven by linkages between the credit market and asset prices. Recently, in addition to credit, bonds and stocks, new complex securities have been developed, e.g., MBS, CDO and CDS, that act as instruments of financial intermediation and evaluation of credit risk. We study their role in the recent financial market meltdown and how they exacerbate leverage cycles. We first introduce a baseline model that allows for financial market boom-bust cycles. Then we extend the model to demonstrate the magnifying effects arising from the pricing of the new financial instruments. Finally, we summarize the mechanism of leverage cycles in a low dimensional dynamic system. We also spell out some implication for monetary policy.

Suggested Citation

Bernard, Lucas and Semmler, Willi, Boom-Bust Cycles: Leveraging, Complex Securities, and Asset Prices (November 1, 2009). NYU Tandon Research Paper No. 148514. Available at SSRN: https://ssrn.com/abstract=1485145 or http://dx.doi.org/10.2139/ssrn.1485145

Lucas Bernard

New School for Social Research ( email )

6 East 16th Street
New York, NY 10003
United States

Willi Semmler (Contact Author)

The New School - Department of Economics ( email )

65 Fifth Avenue
New York, NY 10003
United States

HOME PAGE: http://www.newschool.edu/nssr/faculty/?id=4e54-6b79-4e41-3d3d

Universitaet Bielefeld ( email )

Universit├Ątsstra├če 25
Bielefeld, NRW
Germany

IIASA ( email )

Schlossplatz 1
Laxenburg/Austria, A-2361
Austria

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